Sunday, 13 July 2014

The UKs National Institute of Health and Care Excellence has a basic remit of evaluating the costs and benefits of medical treatment. Last week, it emerged that NICE will change its guidelines so that more people with Type 2 diabetes will have access to gastric bypass surgery. I think it is fair to say that the reaction to this news was not particularly positive. So, has NICE got its sums wrong?

Evaluating the costs and benefits of medical treatment is always going to be a controversial and thankless task. Just about any decision is likely to upset someone. For instance, telling a cancer patient that her treatment is not 'cost effective' is clearly not going to be popular. But, from the other side, saying that gastric bypass surgery is 'cost effective' did not go down well with taxpayers. So, keeping everyone happy is impossible. That does not mean, however, there are not right and wrong ways to measure costs and benefits. And, there seems to be an increasing swell of opinion that NICE is not doing things right.

At the moment NICE bases its decisions on private costs and benefits. So, when assessing whether it is cost effective to treat a person with type 2 diabetes they focus solely on that person. With this mind-set it is easy to see why the gastric bypass is cost effective: the surgery costs relatively little, has a high success rate, and lessens the need for subsequent treatment. And, it is equally easy to see why a cancer treatment may not be cost effective: the drugs are expensive, have a lower success rate, and only postpone the need for further treatment.

But, is it enough to only focus on private costs and benefits? What about social costs and benefits? To illustrate the point with a somewhat provocative example, compare two 40 year old women with cancer. Jane has no family, no job and is living on welfare benefits. Sarah has three young children and a high paying job. Currently NICE treats Jane and Sarah as identical. Once we take into account social costs and benefits it is a no-brainer that treating Sarah is more cost effective than treating Jane. The social benefits include three happy children and the future tax revenue.

NICE and policy makers currently seem to shy away from measuring such social benefits on the basis it all gets a bit too judgmental and controversial. But, that seems too much like wishing a problem would go away. And, the gastric bypass debate illustrates that social benefits and costs are not just about kids and tax receipts. In particular, we have the social costs of moral hazard and fairness.

Moral hazard. The new guidelines will increase the perception (rightly or wrongly) that its ok to live an unhealthy lifestyle; whatever happens, the medical profession will save you. The effect of this will surely be to increase the number of people living unhealthy lifestyles and consequently increase the number of people with Type 2 diabetes. To put things explicitly in the language of social benefits and costs we have something like: treating Fred today makes it more likely that Jack will need treatment in the future.

Fairness. Given that one of the main causes of Type 2 diabetes is lifestyle many people (not all) get Type 2 diabetes because of choices they consciously made. Should they be 'rewarded' for that? Fairness norms typically take account of intentions as well as outcomes. On that basis, someone would be seen as 'less deserving' of treatment if they partly bring about their own problems. So, society might be happier if the money was spent on, say, breast cancer than on people who have Type 2 diabetes because of lifestyle.

Relating cause and consequence in health outcomes is difficult. As is measuring the consequences of moral hazard. Again, however, to dismiss such things as too difficult to take account of seems like wishing a problem away. I think, therefore, the role played by social costs and benefits in health care needs a lot more thought and recognition.

Tuesday, 8 July 2014

We were recently passing Stonehenge and so stopped off to see what the new visitor's center was like. Given that we are members of English Heritage it was free for us to visit. Most visitors, though, were stumping up the standard entry fee of £13.90. And, to put it bluntly, £13.90 seemed like a bit of a rip-off.

Why a rip-off? Stonehenge is a truly remarkable site. It is arguably best seen, however, from the many paths in the surrounding countryside - and these are completely free for anyone to walk. The entry ticket only gets you a 'little bit closer' to the stones. And I'm not sure that's worth £13.90. To put things in context I would make the comparison with Dover Castle (another English Heritage site). Dover Castle is more expensive at £19.30 but you get a whole lot more for your money - castle, wartime tunnels, museums, sea views etc. I would guess the average visitor to Stonehenge probably spends around 30 minutes at the stones while the average visitor to Dover Castle spends at least 3 or 4 hours.

While the entry fee for Stonehenge took me by surprise, the economist in me can easily rationalize it. We just need to look at supply and demand. When we visited Stonehenge it was heaving with tourists, all willing to pay the going rate. Dover has a steady stream of visitors but demand is clearly less (particularly when you take into account that many visitors are members and so get in for free). High demand can explain the relatively high fee. But does it make it any less a rip-off?

One of the few research articles that studies attitudes to 'fair' pricing is Fairness as a constraint on profit seeking by Kahneman, Knetsch and Thaler, published in 1986. Their basic finding was that people consider it unfair to raise price because of shifts in demand. One question that beautifully illustrates the point is 'A hardware store has been selling snow shovels for $15. The morning after a large snowstorm, the store raises the price to $20. Please rate this action as: Completely Fair, Acceptable, Unfair, Very Unfair.' 82% of respondents considered this unfair.

My perception of Stonehenge being a rip-off partly fits this picture of unfairness. It seems unfair to charge a high price purely because of high demand. There seems, however, to be an important difference. The person buying a snow shovel knows what they are buying. A visitor to Stonehenge, by contrast, probably has little idea what they are buying. And they may think the price will be a fair one. In other words, the visitor trusts English Heritage to not rip them off. So, while the person buying the snow shovel will feel hard done by when he sees the price, The visitor to Stonehenge would will feel hard done by after seeing what they got for their money.

Despite the pioneering work of Kahneman, Knetsch and Thaler there is still remarkably little work done on fairness in pricing. This seems a topic in serious need of more study. And let me finish by clarifying that I am not having a go at English Heritage. As a charity they have to make money where they can. And if £13.90 does seem like a rip-off then membership will let you visit Stonehenge, Dover Castle and more!

Thursday, 3 July 2014

The Lochaber Mountain Rescue team in Scotland recently had to rescue someone who fell after setting off up one of Scotland's highest mountains in flip-flops. This looks like a textbook example of moral hazard. Moral hazard arises whenever someone (the principal) 'employs' someone else (the agent) to do a job and the agent takes 'more risk' than the principal would like. In this case mountain rescue essentially 'employs' people to not be dumb in the mountains, but too many of us are dumb in the mountains.

But, here's an interesting issue: In the textbook story of moral hazard the agent takes proper account of incentives. So, a person takes greater risk in the mountains because he knows that mountain rescue will save him. On this account, scrapping mountain rescue might negate the need for mountain rescue.

I would be surprised, however, if the three men involved in this story knew a great deal about Lochaber Mountain Rescue. Instead, I would suggest they were responding to a more generalized moral hazard 'if something goes wrong someone will save me'. With this more generalized moral hazard people are going to risks whether mountain rescue exists or not. So, you better have a mountain rescue.

It is easy to see how such generalized moral hazard can become too big a burden on society. If people expect that 'someone will save me' then we need a lot more than mountain rescue. It always amazes me, for example, when listening to radio phone-ins and the like, how strongly some people feel that they have a right to welfare payments and benefits. It is a kind of 'because I am poor someone must rescue me' type of argument.

Let's be clear. I am not arguing that we should scrap mountain rescue or stop transferring wealth to the poor. What I am arguing is that there needs to be a greater recognition such things involve voluntary transfers. People are not rescued off mountains by pixies, they are rescued by people who voluntarily give of their time. Similarly the money for welfare payments does not grow on trees, it is a 'voluntary' transfer from rich to poor.

If we forget the voluntary nature of transfers then generalized moral hazard will be impossible to keep in check. Basically, we get a strange reversal of roles. It is supposed to be that because of mountain rescue people take more risk in the mountains. Or, because of welfare people take more risk with investing in their future. But, we increasingly seem to live in a world where people take risk in the mountains because they expect there to be a mountain rescue. And they take risk investing for the future because they expect the welfare system to save them.